PPP Loans and Change of Ownership
October 6, 2020
By: Mark A. Mangano
Transactions involving changing the ownership of borrowers with outstanding Paycheck Protection Program (PPP) loans will be subject to new requirements under a procedural notice (Notice) issued by the Small Business Administration (SBA) on October 2, 2020.1 The Notice addresses the circumstances under which lenders may approve a change of ownership, when and how SBA approval must be obtained, and the continuing obligations of the PPP borrower, subsequent owners or entities, and PPP lenders.
Change of Ownership
Change of ownership (Change of Ownership) occurs when:
- At least 20 percent of the common stock or other ownership interest of a PPP borrower is sold or transferred;
- The PPP borrower sells or otherwise transfers at least 50 percent of its assets; or
- A PPP borrower is merged with or into another entity.
For purposes of determining a Change of Ownership, all sales and other transfers occurring since the date of approval of the PPP loan must be aggregated to determine whether the relevant threshold has been met. For publicly traded borrowers, only sales or other transfers that result in one person or entity holding or owning at least 20% of the common stock or other ownership interest of the borrower must be aggregated.
In all Change of Ownership transactions, the PPP borrower must notify the PPP lender in writing of the contemplated transaction and provide the PPP lender with a copy of the proposed agreements or other documents that would effectuate the proposed transaction. This notice requirement appears to include transactions involving borrowers that have already been granted forgiveness or otherwise fully repaid their PPP obligations.
The need for SBA or PPP lender consent and how it may be granted is dependent on the repayment status of the PPP loan, structure of the Change of Ownership transaction, and the availability of funds to create an escrow account.
Failure to obtain lender consent to a Change of Ownership is a condition of default under PPP loan agreements. Such a default could trigger an obligation to immediately repay the loan in full.
PPP note fully satisfied
There are no restrictions on Change of Ownership transactions if the PPP loan has been repaid in full.
PPP loan balance outstanding
If the PPP note is not fully satisfied prior to closing the Change of Ownership transaction, then the approval of either the PPP lender or SBA is necessary. The default requirement is for the SBA to approve Change of Ownership transactions. PPP lenders can only approve the transactions if certain criteria are met.
PPP lender approval
If the Change of Ownership transaction involves a sale or transfer of common stock or other ownership interest or a merger, the PPP lender may approve the Change of Ownership without prior SBA approval if:
- The sale or transfer is of 50% or less of common stock or other ownership interest in the PPP borrower; or
- The PPP borrower completes a forgiveness application and submits it to the PPP lender and an interest-bearing escrow account controlled by the PPP lender is established with funds equal to the outstanding balance of the PPP loan.
If the Change of Ownership transaction involves a sale of assets, the PPP lender may approve the transaction if the PPP borrower completes a forgiveness application and submits it to the PPP lender and an interest-bearing escrow account controlled by the PPP lender is established with funds equal to the outstanding balance of the PPP loan.
SBA prior approval
If a Change of Ownership of a PPP borrower does not meet the conditions described above, prior SBA approval is required. To obtain SBA approval, the PPP lender must submit the request to the SBA including:
- the reason that the PPP borrower cannot fully satisfy the PPP note or deposit escrow funds to cover the loan;
- the details of the requested transaction;
- a copy of the executed PPP note;
- any letter of intent and the purchase or sale agreement setting forth the responsibilities of the PPP borrower, seller (if different from the borrower), and buyer;
- disclosure of whether the buyer has an existing PPP loan, if so, the SBA loan number; and
- a list of all owners of 20 percent or more of the purchasing entity.
The SBA may require additional risk mitigation measures as a condition of its approval.
In transactions involving sale of assets, the buyer must agree to assume responsibility for the PPP borrower’s obligations under the PPP loan. SBA will provide a determination within 60 days of receipt of a completed request.
The Notice includes requirements for segregating the record keeping and accounting for combined ownership groups that have multiple PPP loans outstanding. PPP lenders have an obligation to notify the SBA of completed transactions and comply with the requirements of the Federal Reserve’s Paycheck Protection Program Liquidity Facility if appropriate.
The Notice provides much needed clarity regarding the process for ensuring compliance with the PPP program and its forgiveness process as PPP borrowers engage in Change of Ownership transactions. That clarity comes with potentially significant escrow requirements that can place difficult liquidity demands on some transactions.
1 SBA Procedural Notice: Control Number 500-20057: Paycheck Protection Program Loans and Changes of Ownership: https://www.sba.gov/sites/default/files/2020-10/5000-20057.pdf